Should all Kentucky retirement contributions be subject to FICA and Medicare taxes?

The state of Kentucky is in negotiation with the IRS over claims that all KY retirement contributions withheld from government workers pay should be subject to FICA and Medicare taxes. Alone, the state government is expecting that cost to be between $5 and $6 million dollars. Overall, the cost to KY state and local governments, including schools, is projected to be about $55 million.

The average KY government worker earns $33,000 and a normal non-hazardous duty employee has 6% of their pay withheld for KY retirement contributions. These contributions are currently not subject to FICA or Medicare tax as other reductions from gross pay such as 401(k), Simple IRA, or 403(b).

Based on the average government employee earnings, the cost to each employee would be about $150 and would represent ½ of the total cost since the government would match that amount. For a representative local government unit with 40 employees, the total cost would be about $12,000 per year divided equally between the employer and the employee.

It is currently expected that this change would take place prospectively beginning in January of 2017. However, a final determination has not been made at this time.

posted by Tim Eldridge, CPA